Q: How many funding rounds do startups typically go through? And is there any way to predict how many there will be?

A: No, there’s no good way of knowing. It’s subject to many factors – how fast a company goes through its funding… how much it raises per round… when it becomes self-sustaining… how willing the founders are to dilute their equity stake… and whether the founders are open to a buyout or are determined to take their company public via an IPO.

A company is twice as likely to get bought out than to IPO. And buyouts can happen at any time during a startup’s journey. Depending on these and other factors, a startup can have anywhere from two to 12 funding rounds. And it can take anywhere from two to 12 years to go through those rounds.

I’ve found one half-decent way to cut through all these factors and get a better idea of how many raises a startup wants to do. I ask the founder. Specifically, I ask…

How many more fundraising rounds do you project if you don’t get bought out?
When do you aim to become self-sustaining?
For your liquidity event, do you prefer a buyout or an IPO?
If a buyout, are you getting interest now? And when do you expect bigger companies to start sniffing around/expressing interest?
If an IPO, when might it happen?

Most founders will try to give you honest answers. But honesty isn’t the same as accuracy. They’re telling you their preferences and best guesses. They can be wildly wrong. I understand that there’s a certain amount of speculation built into their answers.

What I don’t understand, and won’t accept, is if they won’t share their thoughts with me on the endgame. The usual dodge is claiming they don’t think about it.

“I’m only focusing on growing the company; the endgame will take care of itself” is a lame response. And I reject it out of hand. They better start thinking about the endgame – it’s why their investors write them big checks! So, in these cases, I ask, “What day next week can you get back to me on these issues?”

Venture capital (VC) firms typically hold startups in their funds for 10 years before closing out the fund. Assuming a startup raises roughly once every two years, some quick back-of-the-envelope math shows VC funds allow their holdings to raise about five times.

Some of the more highly valuated startups have raised much more than that. Palantir ($20 billion valuation) has gone through 12 fundraises. Stripe ($35 billion) has tapped into VC capital 11 times. Didi Chuxing ($56 billion) has raised 10 times. Airbnb ($31 billion) nine times. At the lower end of the unicorn valuation spectrum, Evernote and DraftKings (both valuated at $1 billion) raised five times. Udacity, valuated at $1 billion, raised four times.

Many of these unicorns will be raising at least one or two more times.

So are a lot of rounds a good thing or a bad thing?

Many rounds usually mean a company has strong revenue growth and …read more